Is the Bull Market Intact? How Investors Can Cope with Rising Rates: Jarvis® Update August 11, 2023

Markets have pulled back slightly after a blowout July. Is now still a good time to invest? We answer that question and much more on today's Jarvis Update. I'm your host, Brian Dress, director of research here at Left Brain, joined as always by our chief investment officer and CEO, Nolan Langford. Nolan, welcome to the program.

Awesome. Happy to be here.

Happy to be back after a slight hiatus. I'm back from an extended vacation and I'm one shade of pale, a little bit darker. I hope you can notice. Before we get started, we do like to ask everyone to like and share the videos. If you do find these videos useful, it does help other investors find the videos and it does help us. And also subscribe and hit the bell for notifications. That way, you know, the next time our videos are out and we're out every other Friday with these, I'd also like to ask you to comment below, get a little engagement on the page with your answer to the question: How are you responding to higher interest rates? With that, let's jump into the preview. There has been some selling in the markets as the, as the market digests a strong first 7 months of the year. We've got 2 topics as we usually do. The first one is, is the bull market over before it started? And the second one is, how should investors be responding to rising rates? We've got a few announcements. First of all, we'd like to ask you to sign up for the Jarvis newsletter. We come out with that on a monthly basis now. Last month we talked about what to do with cash in the bank, and the next edition will be out next week. So check that out and sign up at the link below. We produce this show for the everyday investor and we'd like to be a resource for you whether or not you currently work with an advisor. We have a plan for how to invest cash piling up in your bank account. We'd love to talk. Give us a call at the number below. And we'd like to shout out to our audio listeners. We'll give you the number: 630-547-3316. Definitely give us a call if you're looking for some ideas of what to do with cash piling up in the bank. A great problem to have. And also for institutional investors, we've got something for you as well. That's our research service. That's 6 to 8 reports on a monthly basis from our research team. And we also have got a library of hundreds hundreds of reports now over the last few years. So check that out, hit the link below. We'd love to have a conversation with you and see if the research service works for you. Let's jump into the market recap. All 3 averages that we follow this week were down. The S&P 500 was down 0.7%. The tech-heavy Nasdaq was down 1.6%. Russell 2000, that's the small-cap index, was down 2%. We also had some inflation data that came in this week. The CPI, it was decent, but it was a little elevated from last month. We came in at 3.2% on the Consumer Price Index. That's an important gauge of inflation that the Fed takes a look at. That's up slightly from 3% last month. So it did give a little bit of worry to a lot of investors out there. And we're most of the way through the barrage of second quarter earnings. If you've been listening to us for a long time, you will know earnings season is really our favorite time of the calendar. That way we get to learn a lot more about the companies that we follow. Nolan, you have any general impressions of the market action this week or earnings overall since we haven't been together here in about a month?

Yeah, you're right. I— we're in earnings season. There's a lot to sort of unpack this year. I want to address what you said first in regards to the, to the bull market. And is it over? You're right. We have had a pullback. I think it's pretty normal. We've had a really strong first half of the year. You mentioned July being really, really strong, particularly the last week or so. And so we've got this digestion period. I think people need to remember markets normally pause. 8 to 10% correction is not uncommon. If you take a look at a lot of shares over the last couple of weeks, you're down a lot more than that. As far as inflation goes, with that CPI print, they, you know, going from 3% to 3.2% at this point, it's not much to worry about. I think the bigger worry for folks is interest rates. You know, I've talked to a lot of clients who either are looking at second home purchases or doing something real estate wise. And they're still sticker shock. You know, mortgage rates are touching 7%. That is a problem in pricing affordability. And then also psychologically, I think coming from a 3%, 3.5% world for so long, it's just really tough to get our arms wrapped around this 6 to 7% world. With the CPI print, it may make it difficult for the Federal Reserve Board to start lowering rates as soon as the market would like. And I think that's part of what's driven this couple of week sell-off. Even Treasury bonds, if you took a look, take a look at the long-term, the TLT, that is down as well.

Thank you, Nolan. That's a great preview of everything we're going to cover here. So we'll jump right into topic 1. So topic 1 is the state of the bull market. So we wanted to take a little bit of time to digest what we've seen over the past 7 months of the year and looking forward into the rest of the year and into 2024. Markets did start out the year quite strongly. S&P 500 is up about 17%. Interestingly enough, the last time we did a video, which was about 1 month ago, the S&P 500 was up about 17%. So we're unchanged for the last month. We have had about a 5% pullback in the month of August since the month of August began, which does cause investors to wonder, is it really a bull market?

No.

And first of all, let's get the definition out of the way. Can you explain what a bull market is? And can you explain a little bit more how things tend to play out in the early stages of a bull market? How attractive are stocks at these levels?

So I'm going to start with the last one first. How attractive are stocks at these levels? The stock market is back to acting like a market of stocks. So there are some companies that are decelerating on their fundamentals, i.e., WeWork, and those are the ones you want to stay away from. It doesn't matter what the general investment climate is. If you have a business that's having a tough time with sales generation and that turning into cash flow, you're gonna have problems. And then the converse of that, if you have companies like a Celsius of the world that continues to report high and growing revenue streams, high and growing profits, they'll probably work no matter what the general economic conditions are. Generally, those are the type of businesses that we're looking for, hence why we love earnings season so much. Companies actually tell us what they're doing, and there's a lot of companies that are motorboats, not just sailboats. So the 3 big themes that we've seen continue apace. One of them is digital transformation, artificial intelligence, and then the last one is digital advertising. As the cord cutters continue, all of that viewing goes to streaming, and digital advertising is moving from linear to digital. All 3 of those trends are still intact. I think about 80% of the companies have reported they're still trying to— still starting to trickle in. As far as the bull market goes, I think each bull market has different characteristics to it. Some of them are short and shallow, some of them are, you know, Vs. The definition we use is stock prices are going up, I think 20% or something, but just a continuous rise in prices is what we define. I mean, it's the general term that we're using for, for bull market, and bear markets are 20% pullbacks from the top. So we're still in the bull market camp. I think it's still early in the bull market. We could pause here for a while. It's August, training camp is open, we have preseason games, kids are going back to school, we have the last minute vacations. So there's a lot of things happening right now. It's still early in August. Looks like the bull market's still intact.

Thank you for that, Nolan. I just wanted to share, I did just return from a conference, a conference that did have a lot of investors and actually a lot of financial advisors there. One of the themes I heard from a lot of those investors was they're waiting for a big pullback to get into this market. Do you have any commentary for these investors, Nolan? And what also, also what is your level of conviction here?

Well, you know, when you talk about at least the short term in the stock market, it's really a fool's errand to try to guess. Basically, you're guessing what everybody else will do, which is a really tough way to try to make a living. But I do think over time, stock prices follow profits. And if you take a look, the 3 sectors that I mentioned are still printing profits. They're not the only sectors. And I think you can make an argument for, for banks for being a turnaround. At least I should say the financials, not necessarily, we're not big fans of the money center banks. There's a whole group of financials that we are fans of that I think will, uh, turn around after the banking crisis in March. So I would just say for the people that are waiting for a pullback before they get in, if they're waiting to buy shares of the premier businesses, good luck on waiting for a pullback. You know, if something's at 100 and you say, I'm going to wait for a pullback before I buy, and that thing goes to 200 and then it pulls back to 150, opportunity cost error. You're on the wrong side of that equation, which is why we say timing the market is really, really tough.

Totally agree, Nolan. I think back to 2009, it felt a lot like this. You heard a lot of the same things you're hearing today. Like you said, every bull market's different, but it's certainly worth considering the historical context of the last time. Let's move on to topic 2. So topic 2, what to do with these pesky rising interest rates. Nolan, we've talked ad nauseam about interest rates for it seems like years now. As you teased earlier in the program, the average 30-year fixed mortgage rate is creeping back up towards 7%. Are these interest rates as we see them sustainable? Investors are wondering now, is this the time to look for a new house, look for a second house, or is it the time just to, to stay where you are and wait for rates to come back down?

Yeah, I think the residential real estate market, you know, look, interest rates, they trickle through every part of the economy, not only housing loans. You have credit cards, business lines of credit. Interest rates filter into every part of our society, and the fact that they've spiked and they haven't crested yet, that's a problem. It's gonna take an adjustment period. How long that adjustment period is, I have no idea. I don't imagine, at least on the mortgage rate front, we're gonna go much above 7%. I know a lot of people are thinking, so there's a couple of effects. One is, you know, how you are personally situated. I don't think for primary purchases of homes, it's gonna make a huge difference. I think it's the one-two punch of interest rates plus housing prices having risen a lot. Over the last several years. That's really tough. I think the bigger issue, at least for a lot of our clients, is a lot of these clients want to buy a second home for retirement. They don't— maybe they don't want to relocate, but they want to live someplace part of the year. I think those sort of decisions are probably more on hold. That's not a decision that you have to make. But I will remind the viewers and investors, the market can still work with interest rates at 7% on mortgage. I remember when I got my first mortgage, it was just a shade below 7 and it was in '93. And if you take a look, we had a huge bull market in the '90s with rates at that level. There is hope. I just think there's going to be an adjustment period because they went from 3 to 7 so fast. And so we're just going to have to do something we're all loath to do, which is be patient.

Thank you for that, Nolan. It's interesting. We learned a little tidbit about you. You got your first mortgage when you were 11 years old. So that's it. So, Nolan, the Federal Reserve does remain in focus. We're hearing about it. A lot of the Fed governors are out there talking. The September meeting is on a lot of people's mind. Any thoughts on the direction of rates? I know we don't forecast the direction of rates, but how are you thinking about rates and how are businesses doing in the current environment?

So I think the rate thing, they do affect our investors, they affect our clients. You know, if you take a look at like credit card rates, they're in the 20s. I know a lot of our clients don't use credit card debt and rollover balances, but millions of Americans do. And we have trillions outstanding, not only in student loans, but credit card debt and mortgages. And so you look at the consumer and all of these costs are going up. Real estate prices are up. And even if you're not selling a home, real estate taxes are based off a higher base. Your mortgage, uh, insurance is probably based off a higher base. And so all of these things are sort of draining savings from the system. So economically that creates a little weakness. Now, the reason that that's important, you talked about interest rates. Right now it looks like the economic outlook, we're headed hopefully for a soft landing, not a recession, but something mild. The economics that we look at, things are starting to slow down. So that looks to me like the Fed is probably at the end of the interest rate increases. And the question will be if and when they start to actually cut rates. As far as how businesses are doing, I think, you know, businesses tend to have, tend to be ahead of things. CFOs and VPs of finance are pretty sophisticated. What we've seen from a lot of businesses during these earnings releases, sales growth is somewhat tepid. We're not seeing a lot of 40, 50% growers that are accelerating. I mean, we see a couple, but they're definitely unicorns. A lot of companies that were growing in the 20s or 30s, maybe they're growing in the low double digits, but it's not the hypergrowth you've seen before. Q4. That's a direct result of companies cutting back on their spending outside of necessities, as well as households. I think companies— I think this can be very healthy because they've gone from focusing on growth, growth, growth at all costs to now profitable growth. And we're focused now not on the top line but on the bottom line, which is profits. So margins are hanging in there. A lot of cases, margins are growing because they've cut costs. So I think you're going to see growing earnings. And if you put a higher multiple on those earnings, that's how you can get higher stock prices.

My takeaway for the week is, you know, things may be correcting slightly, but that's probably healthy for the market after we've had such a huge run in the first 7 months of the year. Any last thoughts for you, Nolan, as we lead the viewers to the weekend?

Yeah, 2 thoughts. One is Schwab. For all of our viewers that are clients, I'll just remind you, TD Ameritrade got purchased by Schwab in 2019. And on Labor Day, the merger will finally consolidate accounts. There'll be a new website. Look for our communications. The other one is tonight we have Thursday Night Football. The football season is upon us. So get on DraftKings and bet your favorite team. I'm looking for big things for my Dolphins this year.

Very good. Now, it's the best time of year coming right up, and we are happy to be back after a month, and we will see you again next week.

Good luck in the fantasy drafts.